KPMG Transformation Survey - Forbes · kpmg.com. KPMG Transformation Survey ... a KPMG survey of more than 900 senior executives from U.S.-based ... can realize fewer complaints,

Business Transformation and the Regulatory Environmentkpmg.com

KPMG Transformation Survey

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.

93%U.S.-based multinationals in some phase of changing their business models.

Introduction

Ninety-three percent of U.S.-based multinationals have just completed a

business transformation or are in the process of doing so, according to

a KPMG survey of more than 900 senior executives from U.S.-based

multinationals and asset managers, as well as one-on-one interviews

with top executives. This near ubiquity of business transformation is due

to the confluence of several important transformation triggers, including

a tipping point in globalization, a major slowdown in Western economies and

significant shifts in technology and energy costs.

The current dynamic regulatory environment is also a very important trigger of

transformation. Depending on the industry sector, the regulatory environment

can be a partial or dominant trigger for transformation. Regulatory compliance,

though a necessity spearheaded by external factors, is an opportunity to

transform and catapult a company to a new level of competitive advantage,

says Mike Nolan, Global Partner in Charge, Risk Consulting, KPMG.


Business Transformation and the Regulatory Environment / 01

Regulatory Environment as Transformation Trigger

We have entered a new regulatory environment, one that is intended to change behaviors in addition to capturing information and

collecting fees. Such regulation-mandated change is difficult to navigate (not only is it change, but the mandate comes from outside), but it may also yield the biggest competitive advantage if successfully and proactively implemented.

The two sectors currently most affected by regulatory change in the United States are healthcare and financial services. In other industries, such as communications or energy, transformation may be triggered by other primary factors, but it has a strong regulatory component. For example, in the heavily regulated communications industry, a transformation fails if the end-state business does not meet Federal Communications Commission requirements. In the energy sector the same holds true if a transformation violates rules set by the Environmental Protection Agency or the Nuclear Regulatory Commission.


02 / Business Transformation and the Regulatory Environment

Regulatory Environment as Transformation Trigger

The Affordable Care Act and other regulations are causing an overhaul in how healthcare is delivered, how it’s paid, who pays for it and what constitutes value in health delivery. Among healthcare providers, the mandate has shifted from “fee-for-use” to “fee-for-quality.” As a result, providers need to measure new factors, such as patients’ health status and quality of care, rather than instances, such as treatments or hospitalizations. This is a transformative requirement that demands providers run their business in a different way. “The success of the outcome is ultimately going to be in the quality results that are achieved by the individuals or the beneficiaries of the healthcare service,” says Dion Sheidy, Risk Consulting Healthcare Industry Leader, KPMG.

In the financial sector, there are a number of regulatory mandates oriented towards transparency and reducing overall market risk. The regulatory environment is putting pressure on margins, thereby driving transformation focused on reducing costs and making systems more flexible to achieve more transparent, agile and efficient processes, says Mitchell L. Siegel, principal, U.S. Financial Services Transformation Leader, KPMG.

These new regulations often demand complex changes, but also create a big opportunity to spearhead changes in other areas of business for those companies that are able to gain a proactive view of the current and upcoming regulatory landscape.

The energy and effort devoted to the transformation triggered by regulatory requirements should be utilized to improve business as a whole. “A best practice during the regulatory change would be to identify opportunities for business improvement,” says Brad Sprong, Tax Transformation Partner, KPMG.

Sums up Nolan: “Regulations are creating new requirements. Smart companies are using these requirements to transform their businesses beyond compliance, and using this forward-looking view and the outcomes of their regulatory efforts as sources of competitive advantage.”

In the financial sector, there are a number of regulatory mandates oriented towards transparency and reducing overall market risk. The regulatory environment is putting pressure on margins, thereby driving transformation focused on reducing costs and making systems more flexible to achieve more transparent, agile and efficient processes.

– Mitchell L. Siegel U.S. Financial Services Transformation Leader, KPMG

The success of the outcome is ultimately going to be in the quality results that are achieved by the individuals or the beneficiaries of the healthcare service.

– Dion Sheidy Risk Consulting Healthcare Industry Leader, KPMG

“

“

”

”



It is imperative to recognize which regulations have the potential to be used to catapult a company to a new level through a transformation, either on

a company-wide or functional level. Nolan outlines three different approaches that companies currently employ, depending on the industry, the regulations and/or the companies’ approaches to incorporating them:

COMPLY

Approach based purely on compliance with the regulations without making

any transformative changes to business strategy or operations. This approach creates burdens on efficiency and profits, without creating much direct company financial or operational benefit from regulatory compliance.

You need to build a solution flexible enough to accommodate future changes and different scenarios as they evolve.

– Todd Lohr Managing Director, U.S. Transformation Enablement Leader, KPMG

“ ”

COMPETE

Approach based on efficient incorporation of

compliance, aimed at achieving parity with direct competitors. This approach is often employed in the healthcare provider space, with its razor-thin margins. Competitiveness in this case is based on keeping up with rivals in terms of efficiencies in complying with ACA, HIPPA or other laws. This approach ultimately aims to diminish the burden of compliance with regulations but is not generally transformative at an enterprise level.

In both of the previous approaches it is especially important to recognize that what’s different about transformations triggered primarily by the regulatory environment is the need to understand the regulations themselves and how they will be interpreted, says Todd Lohr, managing director, U.S. Transformation Enablement Leader, KPMG. “You need to build a solution flexible enough to accommodate future changes and different scenarios as they evolve,” he says.

CATAPULT

Approach based on using the information necessary

to comply with new regulations to achieve transformation that improves business operations, resulting in competitive advantage. As an example, banks are at a unique cross-roads. The current environment – marked by intensified regulatory attention and increasing costs for noncompliance – creates an opportunity for banks to use the new heightened regulatory awareness to shift away from reactive remediation and to proactively adopt a culture of compliance. By embracing the underlying spirit of regulatory rules and standards on an enterprise-wide basis, including its products, services, operating models, affiliates, and third-party relationships, and refocusing corporate strategies toward customer needs, banks can realize fewer complaints, lessened attrition, improved organic growth, and stronger economic return.

Another example of achieving competitive advantage by adapting to the regulatory environment is a healthcare company that aimed to comply with the medical device excise tax. After gathering new data points



required for compliance, the company undertook further analysis of this new data, which revealed vast disparities in prices charged for the devices in the same region. The company then proceeded to reevaluate its product profitability, pricing strategy, sales force performance and motivation, and marketing relationships, thus opening the door to dramatic performance opportunities.

The key and common element to the success of a regulatory transformation is data. New regulations require that companies gather new data points, for which many companies are not well set up. But for this to be transformative, companies must also be capable of analyzing the new data beyond compliance, drawing conclusions about how to improve business based on this new, rich trove of information. This will require new capabilities, focus, and commitment for many companies.



One of our traditional sources of revenue streams, which is regulated generation, was being reduced fairly rapidly, and we needed to respond to that circumstance. We realized that there was going to be a hole that needed to be filled.

– Brian X. Tierney Chief Financial Officer, AEP

“”

with company strategy. They also wanted a more collaborative and less hierarchical decision-making process.

AEP learned some transformative lessons from this process. “If you communicate better, if you’re more collaborative, if you recognize exceptional performance, I think the sky could be the limit for the future,” says Tierney. “And so by taking the business problems that AEP had and the thirst and desire on the part of our employees to be more engaged in decision making to help drive where we’re going strategically, the things came together very, very well.”

American Electric Power, an electric utility company operating in 11 states, is an example of how to be proactive when faced with regulation-

induced business transformation. Ohio, one of its largest markets, has separated power generation from the integrated utility activities of generation, transmission and distribution, and deregulated it. “One of our traditional sources of revenue streams, which is regulated generation, was being reduced fairly rapidly, and we needed to respond to that circumstance,” says AEP’s chief financial officer, Brian X. Tierney. “We realized that there was going to be a hole that needed to be filled.”

That hole would not be filled via mere cost-cutting but through a repositioning effort, as AEP CEO Nick Akins described it. The executives focused on five pillars for repositioning: lean generation, finance and accounting, IT, procurement, and organizational and business effectiveness.

The company turned to its employees for repositioning ideas—reaching out via survey and focus groups to ask first how they felt about the company culture. The results showed that AEP’s employees cared about

the company, liked the company, cared about its customers and wanted to be given the freedom to do a better job for the company and its customers. They wanted to know that their work was consistent

Employees provided solutions in many areas, such as streamlining procurement of safety equipment, improving the heat rate at power plants (i.e., not having unnecessary compressors going) and adding incremental packing and insulation in hot areas of the power plant. In fact, the repositioning has turned into a continuous process and, after driving effectiveness in the first five pillars, AEP’s executives are now establishing new pillars to focus on for the years ahead.



FIGURE 1. Businesses that incorporate a regulatory agenda into their transformation planning have a greater propensity to:

George Barrett, chairman and CEO of Cardinal Health, Inc., underscores the dynamic part of the regulatory environment when he says: “Anyone

in healthcare who feels totally satisfied or relaxed is not paying attention. Between the regulatory and legislative changes and the simple realities of our national health, both economic and physical, it is clear that healthcare will change.”

But he also sees the bigger picture, the way that regulatory-triggered transformations correlate with—and feed off—other triggers. “Regardless of exactly how the Affordable Care Act rolls out, we cannot escape the fact that 10,000 people per day are entering eligibility age for Medicare—many suffering from at least one chronic illness. The healthcare needs of this population will only increase over their lifetime. So, our transformation and our strategy are built around five key principles:

“First, demographic, economic and industry forces will require a healthcare system that places a high priority on efficiency and cost-effectiveness.”

“Second, care will need to be more coordinated and delivered in multiple settings—leaning toward those settings that are most cost-effective.”

“Third, people will want and need care in the home. And they will become increasingly knowledgeable and involved in their own healthcare.”

“Fourth, our healthcare system will need continued innovation of pharmaceutical and medical products, but also cost-effective alternatives to mature products.”

“And fifth, as parts of the system shift from fee-for-service to payment-for-outcomes, hospitals and Integrated Delivery Networks (IDNs) will increasingly look to partners with specialized expertise in this new environment.”

Even when transformation is not triggered by regulatory compliance, it’s nonetheless critical to ensure that regulatory

requirements are embedded in the upfront design of the solution, because they create a set of conditions that could otherwise cause a lot of reworking in the back end. The positive result of the sheer amount of regulatory change in some industries has been more frequent inclusion of regulatory elements at the very start of the transformation process.

The KPMG survey reveals a correlation among vigilance about assessing operating models against strategy, being more in tune with better practices regarding the processes and structuring of their transformations, and inclusion of the

regulatory agenda. In fact, 75% of survey respondents who incorporate regulatory changes into their transformation initiatives assess their operating models against business strategy on either a quarterly or annual basis.

Being vigilant about all areas of business, including the regulatory environment, is akin to having a regular physical at the doctor’s office versus reacting haphazardly and narrowly after symptoms arise. “Companies that are vigilant are going to tend to include the regulatory data in their situation assessments on an ongoing basis,” says Nolan.

Manage the execution of transformation initiatives by a dedicated internal organization

Assess operating models against business strategy on either a quarterly or annual basis

Employ a formal process for prioritizing business transformation initiatives

80%

75%

68%



It’s transform or wither in today’s business environment, with multiple transformation triggers—including technology, regulatory and globalization

shifts—creating strong pressure simultaneously. Most corporations understand

this, with 93% of survey respondents saying that they have just completed, are planning or

are in the midst of a business transformation. The research and interviews conducted by KPMG

point to the following lessons about best practices for approaching transformation and the regulatory

environment:

Regulatory compliance may create opportunities to catapult business to a new level.

The energy and effort devoted to the transformation triggered by regulatory requirements should be utilized

to identify other opportunities for business improvement during regulatory compliance.

Regulatory vigilance—including regulatory elements as part of business transformation—leads to increased acuity about

transformation processes. Research shows that companies that integrate regulatory issues in the transformation framework

are more likely to assess their operating models against business strategy and follow better practices regarding the

processes and structuring of their transformations.

Conclusion



ContributorsKPMG would like to thank the following executives for sharing their time and expertise:

George Barrett, Chairman and CEO, Cardinal Health, Inc.

Todd Lohr, Managing Director, U.S. Transformation Enablement Leader, KPMG

Mike Nolan, Global Partner in Charge, Risk Consulting, KPMG

Dion Sheidy, Risk Consulting Healthcare Industry Leader, KPMG

Mitchell L. Siegel, Principal, U.S. Financial Services Transformation Leader, KPMG

Brad Sprong, Office Managing Partner and Tax Transformation Partner, KPMG

Brian X. Tierney, Chief Financial Officer, American Electric Power

MethodologyThis report is based on a survey of 910 executives at U.S.-based multinationals and banking or asset management firms conducted by Forbes Insights in June and July of 2013. Executives were evenly split among 13 industries/sectors. Out of 709 corporations, 90% of executives came from companies with revenues over $1 billion. Out of 201 banking or asset management firms, all had assets under management of at least $5 billion. Sixty-seven percent of respondents were C-level executives, and the rest were managing director or above. They represented all major corporate functions.



© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Stephen G. Hasty, Jr. Partner, U.S. Innovation Leader for Advisory

Phone: 704-371-5234 [email protected]

Robert T. Vanderwerf Principal, U.S. Transformation Strategy Leader


Brad Sprong Office Managing Partner and Tax Transformation Partner


Mitchell L. Siegel Principal, U.S. Financial Services Transformation Leader


Todd Lohr Managing Director, U.S. Transformation Enablement Leader


Stephen T. Hajdukovic Audit Partner


For further information about this survey, and how KPMG can help your business, please contact:

Documents

KPMG Transformation Survey - Forbes · kpmg.com. KPMG Transformation Survey ... a KPMG survey of more than 900 senior executives from U.S.-based ... can realize fewer complaints,